Assurance reviews could be welcome filip but 'audit lite' concerns remain

AS the number of UK firms registered to audit company accounts continues to fall, there may be some revenue-related hope on the horizon for smaller practices in the form of assurance reviews engagements – an alternative to audit for audit exempt organisations.

Smaller practices up and down the land are increasingly turning their backs on retaining an audit license due to the onerous compliance burden and spiralling expense of registration. The trend was borne out in the Financial Reporting Council’s (FRC) latest ‘Key Facts and Trends in the Accountancy Profession‘.

The accounting and audit watchdog’s annual report, which highlights emerging shifts within the profession and its member bodies, shows that the number of registered audit firms continues to decline, reducing by 4.9% between 31 December 2013 and 2014. And that’s’ on top of a 3.8% fall in 2013.

Such a fall coincides with a rise in the number of audit exempt companies filing annual accounts at Companies House, nudging up to 73.5% in 2012/13 from 70.2% in 2009/10. Fast forward to 31 December 2014, and the number registered to audit was 6,635, a double-digit fall of 11% over the previous four years.

This in turn follows increases in the audit exemption in 2004 and 2008, while earlier this year a new EU accounting directive slipped into force under which member states had the option to significantly raise the thresholds of businesses not required to file full, audited financial statements for those with a turnover below €12m (£10.3m) and a balance sheet below €6m.

BIS, after consulting on the proposed new regime for small companies in 2014, has now ratified the raised accounting threshold to its maximum amount, while limiting the information that can be required in small company accounts.

Turning point

While cynics may baulk at what could be dubbed ‘audit lite’, the product has a growing army of fans and of course, a still sizeable chunk of the profession who remain less than convinced by its relevance to their clients and in turn, their practice.

Perhaps it’s biggest fan is Michelle Fisher, one of seven partners at Pinner-based practitioners, Sobell Rhodes. And as one of the founding creators of the service, originally – and perhaps on reflection – too quietly launched in 2006, Fisher and other instigators first tried to interest other institutes to jointly develop the idea, but when none of them were motivated to join in, the ICAEW committee duly ploughed on alone.

“I first became involved in 2004 when the audit exemption threshold went up dramatically from £1m to £5.6m,” recalls Fisher. While there was interim technical guidance issued in 2006, the project really took off again when it was taken up internationally with the issue of the ISRE.

“It’s not suitable for everyone, but is good for fast growing companies or businesses considering a sell-out. If I’ve got a small limited company with a husband and wife shareholders who are both very actively involved in the business and the accounts with no bank pressures, there would be no advantage to them,” Fisher explains.

One client, thinking of doing a sell-out in a few years’ time had asked Fisher to do an assurance review. The fee for that is £950, whereas an audit would be £3,000.

“I recently became aware that banks are asking for it”, a moment she believes is a “turning point” for the product. But it wasn’t always so and such a positive step forward is a welcome departure from its somewhat sluggish uptake in the past, as Fisher recalls.

“I’ve been speaking to banks about assurance products for ten or 11 years and the answer was ‘well, unless you can get head office to give us an edict that we have to do this were not really interested – it sounds a great idea in theory but in practice without that head office edict, we can’t do anything’. But only recently I hear on the ground that banks are saying ‘this is an interesting set of accounts but let’s have an assurance review on it'”.

Lacking traction

Fisher believes it’s the “only institute product that has been grassroots and SME- led” thanks in no small part to the original and subsequent sub-committees being made up primarily by people from smaller firms.

Another fan is Catherine Wilshire, compliance and technical partner at Price Bailey. Her firm actively promote the offering.

“We have got a few clients now who moved over to assurance reviews. One client has a large group of family owned trusts. They wanted a form of assurance without the complexities of audit. They’re much happier with the assurance review. A number of other entities have voluntarily decided not to have an audit and taken up AREs, as have some of our clients in Guernsey.

“We’ve had some very positive feedback on it. It’s a great product and I’m surprised more people aren’t doing it – it’s probably down to a lack of awareness and people being stuck in a routine.”

But John Warner, managing partner of Accountancy Top 50 + 50 player and Yorkshire’s biggest regional accountancy practice, BHP, is less convinced of its immediate currency.

Capital providers have yet to fully accept the service and there are concerns an audit lite product will lack the quality and rigour of a full statutory audit.

“I don’t believe it’s got traction yet, but next time the audit limit goes up it might gain some traction, but banks need to understand it and what it offers and I don’t think they yet understand the difference between assurance and audit,” Warner says.

In a cautionary note, Fisher adds: “You do worry that there’ll be the next audit scandal and then people will say, ‘oh, why didn’t we have an audit'”.